Monday, October 20, 2014

Oil prices keep going down, but this is not good news

There is plenty of movement in the oil world:after five years ofrelatively stable prices, the legendary "barrel" is coming downfromover$ 100tounder 90, and it looks like it will keep falling. What's happening? Has anyone foundnewresources? Oris it Saudi Arabiausingthe "oil weapon" to bring downRussia, the heir of the old "evil empire"?

Inreality, it isnothing like that. There are no majornew discoveries of oil in the world and the Saudi oil weapon is much less fearsome than it is normally described in the media.But, then, why are prices going down? There aregood reasons, but we need to understand them and, more importantly, to explain why thelikely future dropin oil priceswould NOT be agood thing; indeed it could beaplanetary disaster.

First of all, we should take into account that oil isa finite resource, butalso that it is subjectto the laws ofsupply and demand; it cannot escape the controlof the entitywe call"the market". So, we are seeing two contrastingtrends in the oil market. One is thegradualdepletion ofthe so-called"conventional" oil; that is liquid oil extractedat relatively low costfrom wells.As a consequence, the production of conventional oil is static or declining almost everywhere. The other trend isthe increase in the productionof "unconventional" oil, that is combustible liquidswhich are obtained, for example, by treatingoil sands, or biofuels,or"oilshale," the kind you obtain by means of the"fracking" process.

Up to now, therapiddevelopment of the productionofunconventional oil-especiallyshale oil in the United States-has compensated ​​theworldwide declinein the productionof conventional oil; it has, in fact, allowed production to keep growing.At the same time, many of themajor economiesareinrecessionandare reducing their energy demand. Italy, for example, haslost 25%of itsoil consumptionover thelast five years,andthe descentcontinues.Othereconomies, such as in Germany,arein trouble,even if not yetinrecession.Thiscauses a decreasein the world demand.

So, the twofactors-increase in supplyanddecrease in demand- go in the same direction: the market wants theprice of oillowered, and it goes down. We should also take into accountthat these phenomenaare often heavilyinfluenced by the perceptionsof financial operators: ifeveryone thinks thatthe price of oilshouldfall, then it will fall. Inpractice, we risk to see not just a drop in oil prices, but also a true meltdownof the oil market, like that witnessed in 2008-2009.

Many people would be tempted to believe that lower oilprices are a good thing, but it is not so. If we will see a repetition of the scenarioof 2008-2009, the result can only be a disaster(asitwas at that time). The problem is thatoil resourcesare notall the same: to produce certain types ofoilis very expensive. Extracting from tar sands or from oil shales, for example, is more expensive than extracting from traditional wells. So what happensif pricesgo down? It happens that extracting and marketing certain types ofoil does not generate a revenue anymore. Then, those types of oil are not produced any more. Whowould ever want toproduce at a loss?

Inpractice,if prices decrease, the world's oil production decreases: have you ever eard of"peak oil"? It is just this phenomenon: "peaking"does not mean running out of oil; absolutely not.It meansthat producing more oil is not as convenient as it was before, hence less is produced. Therefore, we see a peak in the production curve. That's peak oil.

And that's exactlywhat may happenin the near future. Oil atover$ 100 a barrelallowedthe industry tomaintain a fairly constant production- actually even to increase it slightly over the past few years. Oilat significantly lower pricesdoes not allow itanymore, and it forcesthe industry toreduce production.This leads, amongother things, to the closing ofmany refineries, as is happening inItaly.

In the end, it is perfectly possible that oil will costless in the future, but also that we won't have the money topay for it. There is nothing to do about that: it is the market, baby! But above all, the troubles come from our attitude that continues to make us believe that oilwill lastforever.It is not possible. Let's startthinking about that!

Hello! This is Ugo Bardi - I tend to overextend myself on the Web by writing a lot of stuff. Presently, my blog in English is titled "Cassandra's Legacy". In English, I have another blog a little more esoteric, titled Chimeras. The first is dedicated to sustainability, the second to mythology, history, and art. See also my latest book, "The Seneca Effect," Springer 2017.

13 comments:

Lot's of Americans seem to be crowing about how US innovation is taking down OPEC and driving down the price of oil, and putting the US in a stronger position. I have to admit that I am finding this difficult to get my hands around.

"Since 2008, says Bernard Weinstein, an energy expert at Southern Methodist University, oil production in the United States is up 60 percent. That’s an additional three million barrels a day. Within a few years, predicts Morse, America will overtake Russia and Saudi Arabia and become the world’s largest oil producer.

What’s more, according to another article Morse wrote, this one for Foreign Affairs magazine, “the costs of finding and producing oil and gas in shale and tight rock formations are steadily going down and will drop even more in the years to come.” In other words, the American energy industry might well be able to withstand further price drops easier than OPEC members."

2015 will become very interesting. when ebola is really the black swan and peak oil is here , industrial civilication will go bust (recommend orlov's post to ebola). good for gaia but bad for humans. fast enough preventing earth from a runaway greenhouse effect? non-humans will hope for the perfect storm (ebola, peak all, climate change, nuclear meltdown, etc) in the next months...

Not sure Ebola qualifies as a "true black swan" since we have known about it for quite a while and have had plenty of time to prepare (even though we haven't) But a considerable amount of gold production comes out of West Africa so if the whole of West Africa starts to be affected (let alone becomes engulfed) by Ebola this could affect the supply of gold, force up its price enough and for long enough to create a "shorts squeeze" for some of the bullion and investment banks who have been manipulating it, and this could create other significant knock on effects in the (already teetering) financial system with serious repercussions (to start with by popping the U.S. stock market bubble) and doing other things which perhaps could be viewed as having "black swan-like" characteristics. And if Ebola seriously takes hold anywhere else outside Africa then all bets are off for the world economy. But Ebola also could end up doing very little though other not exactly black swan-like things such as peak oil could, and of course plenty of other true black birds also could come along with a fairly good probability. So I agree that 2015 is likely to be a pretty interesting year.

This is only a problem when shut down wells never go online again because the price for maintaining the infrastructure during the low price period is too high. But on the other hand the infrastructure is in place anyway and when you do not use it for a year you can continue using it next year maybe with a month repair costs.I do not think that falling prices are a problem because they will naturally go up again. The only question is when. This will lead to some solutions of the "collapse staircase step size differential equation"

Most people do not see the absolute waste of money spent in the oil feild.They will tell you the cost of drilling but not the income of their employees.Many are paid in excess of 30000 a month yes a month.Perhaps a good drop in oil prices will jolt them back to reality.

Yes, spot on. I suspect this is the low pressure point before the Hurricane hits. The market is a man made fiction that simply ignores silly little things like, oil being a finite resource or the fact that numerous expert reports including the those from the US Govt expect the fracking/ shale bubble to burst badly and soon. No. The market just looks at now and ignores those pesky little facts. SHTF time starts next year and really starts spraying around the room by 2017.

Reality is about to catch up with Economic fiction and the reality check will make all the combined previous disasters faced by mankind pale into insignificance. The scariest thing I've seen in along time is the human population time line superimposed over oil production. 6 Billion people only exist because of oil.

Ugo Bardi's blog

This blog deals with the future of humankind in view of such things as the overexploitation of natural resourecs and the effects of global warming. It is a bit catastrophistic, I know, but, after all, the ancient prophetess, Cassandra (above in a painting by Evelyn de Morgan) turned out to have been right!

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Listen! for no more the presage of my soul, Bride-like, shall peer from its secluding veil; But as the morning wind blows clear the east,More bright shall blow the wind of prophecy,And I will speak, but in dark speech no more.(Aeschylus, Agamemnon)

The Seneca Effect

The Seneca Effect: is this what our future looks like?

Chimeras: another blog by UB

Another blog by Ugo Bardi; it is dedicated to art, myths, literature, and history with a special attention to ancient monsters and deities.

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I try to publish at least a post every week, typically on Mondays, but additional posts often appear on different days. Comments are moderated: no insults, no hate, no trolls. You may reproduce my posts as you like, citing the source is appreciated!

About the author

Ugo Bardi teaches physical chemistry at the University of Florence, in Italy. He is interested in resource depletion, system dynamics modeling, climate science and renewable energy. Contact: ugo.bardi(whirlything)unifi.it